The following formulas and such are just some of the methods we use in our investment selection process. Our analysis is always ongoing, which is also known as “dynamic”. We liken the use of formulas and analysis, as a road map. The map changes continuously. The key to this type of analysis is to understand the big picture. The understanding of the big picture is known as, “seeing the forest and not the trees”.

Look at “one time charges”. If they are recurring in nature, consider using them as normalized expenses.

7. Earnings Ratio – This is the inverse of the Price Earnings ratio (PE). Intelligent Investor by Benjamin Graham (pg 186 of 4th edition) indicated that this should be as high as the AA 30 year bond rate.

Earnings Ratio > Current AA 30 Year Corporate Bond Rate

8. Other Graham Criteria from Intelligent Investor . We don’t place as large an emphasis here, yet we certainly look at this.

Current Assets 150% > Current Liabilities

debt < 110% of Current Assets (for industrial companies)

9. Seven Deadly Sins of Corporations

A. Recording revenue to soon

B. Recording bogus revenue

C. Boosting one-time gains

D. Shifting current expenses

E. Improperly recording liabilities

F. Shifting revenue forward

G. Shifting special charges

10. Price / Growth Flow ratio– We will use this ratio when working with companies that have large Research and Development (R&D) expenditures.

13. PEG and PEGY ratios – These ratios measure P/E over Growth Rate. The PEGY includes yield in the measurement.

We generally like to invest when PEGS are < 1.

PEG = PE/Growth Rate

PEGY = PE / (Growth Rate + Dividend Yield)

14. Graham Ratio – This is a ratio which I named. Benjamin Graham had a theoretical formula which we refer to. The formula involves book value, hence one needs to consider the differences between “tangible” and “intangible” book value.

I was thinking about this formula on December 17, 2009, and frankly it makes no sense to me. Feel free to comment. This could be a flawed formula.

P= E/(K-G) or P= D/(K-G)

P= Stock Price

K= Total Return expected (discount rate)

G= Growth rate of earnings

E= Earnings

D= Dividends

I added this formula on the same date 12/17/09 . I have been meaning to study it. I think it is tied into DCF analysis. It too could be flawed.

P = CF (year 0) + (1+G) / R – G

It looks to me, and I could be wrong, that R would be the Discount Rate. I typically will use a discount rate of at least 10% and most often 15% or higher. I got this formula from Hamilton Lin. He mentioned it only works when R > G.

He then used Total Debt to Trailing 12 Months EBITDA and feels a ratio of 3 or less is a conservative benchmark.

25. Goodwill/Tangible Assets > 20% – Watch for potential impairments.

26. I attended this session 5 years ago. I’ve been busy ;-), so I am just getting to transcribing the notes now. Really good stuff. Mulford is good at quality of earnings and cash flows. He has a few awesome books. One is “The Financial Numbers Game: Detecting Creative Accounting Practices,” and the other is, “Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance.”

Here are notes to this session. There were some areas I may have taken or recalled incorrectly.

A. Look at PPE / Revenue Days.

B. Look for gaps between cash flow and earnings. Always ask why CF is different than EPS. Why are rates of growth different?